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Offshore Backlash Redux

It’s back. With the Democrats in Congress and soon perhaps in the Whitehouse and an economy that most think will turn sour soon, it is almost the perfect storm. Trade in services, fondly called “offshoring” is back on the front pages and it bodes ill for global business.

This article on the Wall Street Journal’s front page last week draws largely from Allan Blinder’s work. Blinder, an economist at Princeton has been a diehard free-trader all his career. But now he has changed his position to one where he still believes in the long term benefits of free trade in goods and services, but thinks that in the short-term the pain due to offshoring of services will be great.

His research follows this logic. 85% of employment in the US is in the services sector and only 15% is in manufacturing. A very large proportion of these jobs in the services sector are vulnerable to offshoring – from computer programmers to accountants – by his estimation 40 million jobs. The disruption to people’s jobs and lives because of offshoring is being underestimated, according to Blinder. The US needs to do much more on retraining, education, wage loss insurance etc. to help cushion the average citizen.

He also appeared on the Diane Rehm show on NPR. (The WAMU website was down at the time of writing this, but the link should be there). On the show he reiterates his support of free trade and explicitly states that he is not advocating any barriers to trade in services even if it was feasible to do so (he doesn’t think it is). But he does want the country to recognize that a “new industrial revolution” is upon us and that we need to do something to prepare for it.

This subject is guaranteed to kick up a storm of debate. You can already see it forming on economics blogs like Brad DeLong’s (check out the comments). Next week this is going to hit the mainstream press.

In May Jagdish Bhagwati, an ardent free trader and Alan Blinder will debate these issues at Harvard University. So far Bhagwati has described Blinder’s thesis “dead wrong”. Right or wrong, my fear is that the media will flash the “40 million jobs” so many times that no one will notice that Blinder’s solutions do not include erecting barriers. In the runup to the 2008 Presidential elections there will be a lot of pressure on the candidates to support anti-trade measures. That will be a pity.

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Great point Basab,
I will not claim to be an expert on globalization or economic theory or even free trade. However, jobs being generated in India (and rest of the ‘Third World’) is a good thing.

Now, the bigger question to economists like Mr. Blinder: Is the ‘global job pie’ remain static or will it grow due to free-trade and globalization? If the sum total is going to grow, it is a “win win” deal; right?

Extraordinary to think that none of your readers, a large number of whom might be affected by this, has anything to say about the matter. Does silence mean that they expect this backlash? Or does that mean they accept it will happen but know it may not change things much? Or does that mean they do not care about it?

Shefaly, two reasons – one that the volume on offshore backlash still isn’t high. second, that most IT Services companies will prefer to remain quiet on this and let umbrella organizations like NASSCOM and ITAA do the talking. More credible that way.

There’s a few things going on here — Blinder’s primary concern seems to be the costs of dislocation, based on a simplistic extrapolation and the BLS numbers of “potentially” offshorable jobs. He’s way off… For example: India’s total employment in IT/ BPO after 10 yrs of blistering growth is about 1.2 mm of which 70% is focused on the US ie, 840K (approx). In a total labor force of 140 mm, that’s nothing. Similarly, India’s exports to the US (IT + BPO) is approx $15 billion to $17 billion. Given that the US GDP is north of $12.5 trillion, India isn’t even a rounding error.

Blinder is using anecdotes rather than facts — what sort of economist does that?

While the offshoring brouhaha may resurface, it’ll be far less muted than last time…